Comment: The following article appeared in the Cyprus Weekly of Nicosia on 2 May 2003

Economic aspects of the political developments

THE
announcement of limited freedom of movement across the ceasefire line
by the Turkish Cypriot leadership just before Easter and the decision
this week by the National Council to introduce the long-awaited measures
designed to improve the situation for Turkish Cypriots, have changed
the outlook for a solution of the Cyprus problem and have brought to the
fore economic issues that have not been considered for some time.

Essentially,
Pandora’s Box has been opened, the people are leading the way, and they
want peace and a solution, and governments all around are struggling to
adapt and catch up.

The aim of this
article is to raise some of the economic aspects of the situation, as it
is emerging, in order to improve understanding of the likely
repercussions and to provide some guidance as to issues that must be
addressed.

The basic principle
is that economics has its own rules and politicians can never have full
control of the economy, and therefore economic measures create their own
situation which comes back to influence the political situation.

No trouble

The first lesson
from the freedom of movement has been that Greek Cypriots and Turkish
Cypriots have no trouble getting along together. In fact the reception
the Greek Cypriots have received in the north has been moving and very
friendly.

Furthermore, both
Greek and Turkish Cypriots appear to have similar views with respect to
the Turkish settlers, whose reaction to the present situation
demonstrates that they are aliens and have not become integrated into
Cyprus society.

The implication of
this is that both sides have to take difficult decisions; the settlers
have to leave but those that are married to Turkish Cypriots have to
stay under the normal provisions of marriage to foreigners.
Unfortunately, in economics the settlers, too, will benefit, and Cyprus
will become more attractive to them, even if they are not allowed to
come to the south or acquire Cyprus and European citizenship. It is
surprising how many Greek Cypriots found that their taxi drivers were
settlers.

Difficult

If the arrival of
settlers in the occupied area is not controlled the economic
improvements there arising from the measures will attract more settlers,
making the solution of the Cyprus problem more difficult.

The main outcome of
what has occurred is that it will be clear to everyone that the economic
improvement for Turkish Cypriots does not depend on Turkey or even the
European Union, but on integration with the economy of the Republic of
Cyprus. To most Cypriot economists this has been obvious, but the
foreign economists and Turkish and United States experts in general,
have always ignored or underplayed the role of integration, because they
have generally accepted Mr Denktash's fantasy land economics for fact.

Already the
expenditure of Greek Cypriots passing into the occupied area when
annualised surpasses the total export earnings of the northern part of
the island (about $60m a year).

Shot down

Denktash's outdated
and unfounded mercantalist economics have been shot down as a
politically-motivated myth. How can the people and the economy be
separated into north and south? They cannot, in a globalised world with
freedom of movement, freedom of trade and all the other freedoms. Every
obstruction to stop the so-called danger of economic domination will
victimise the Turkish Cypriots in economic terms and prevent welfare
equalisation. In the modern world economic autonomy does not mean a
fortress mentality, of quotas and tariffs, but it means efficiency,
productivity and innovation. Economic autonomy is not gained through
handouts, and there the Turkish Cypriots have for years held the world
record in economic aid received. Autonomy, in economic terms, is based
on the ability to earn income through legitimate production in a
competitive world.

Cyprus has had a
successful economic history since independence, assuming the political
situation does not obstruct economic policy, there is every reason to
believe that the economy will continue to prosper.

With the Turkish
Cypriot economy being less than 10% the size of that of the government
controlled areas, under conditions of integration, economic laws will
cause the Turkish Cypriots to gain quickly from the four freedoms, while
for the Greek Cypriots the benefits are more marginal.

Every barrier to the
freedoms will restrict the improvement of Turkish Cypriot welfare.

Appreciated

One aspect not yet
given publicity or attention is the role of the Cyprus pound in the
occupied area. The Turkish Cypriots have always appreciated the strength
and stability that the Cyprus Pound has always offered, not least
because they have suffered acutely from the constant depreciation of the
Turkish Lira. At the time of the Turkish invasion in 1974, the value of
the Turkish Lira to the Cyprus Pound was 38 TL, while today it is less
than three million. A clear indication of massive economic failure that
has not been the responsibility of the Turkish Cypriots, but has been
imposed upon them by Turkey.

With freedom of
movement the Cyprus pound will dominate in northern Cyprus, also. The
Turkish Cypriots themselves are demonstrating that Denktash's position
in the Cyprus talks of trying to eliminate the Cyprus Pound has no
public support whatsoever.

The large scale
circulation of the Cyprus pound will also allow Turkish Cypriots to open
bank accounts in the Government-controlled area. A fact that will be
greatly improve their situation given the terrible state of the whole
Turkish banking system, and the frequent collapse of banks in the
occupied area.

In fact it would be
to everyone's advantage if the Central Bank of Cyprus would allow
Turkish lira to be exchanged for Cyprus pounds. This could be done in a
controlled manner until the May 2004 EU accession date and would in any
case occur freely thereafter, with full capital harmonisation. The
result would be that the Cyprus pound would dominate much earlier and
the two economies will be more closely integrated.

The risks would be
minimal given that the Turkish lira is an internationally quoted
currency, and the risks would be reflected in the exchange rates.

A further advantage
of this would be to stabilise the Turkish Cypriot banking system by
adoption in practice of the Cyprus Pound, reducing dependence on the
unstable Turkish lira. This would lead to the radical improvement of the
Turkish Cypriot banking system to meet the new challenge from the
south. Such improvement would arise because the main threat to banking
in the occupied area comes from Mickey Mouse economics, based on Turkish
practice, which basically means the banks take the people's money and
make profits by buying Turkish government bonds, leaving the people
without effective banking services and limiting access to loan
facilities.

By contrast, in
southern Cyprus, the banks are geared to dealing with the people and
providing loans and service.

The fundamental
weaknesses of the banking system in occupied Cyprus must be addressed if
the population is to gain fully from economic integration.

Competition with the
south would be a factor that would force change, but the subordinate
local administration of the occupied area should at the same time
introduce modern banking standards bases on EU directives. The sooner
this is done the greater the benefits from economic integration for
everybody. The last thing the Turkish Cypriots need is another Turkish
banking crisis.

The above
constitutes only a sketch of some of the economic implications of what
is occurring in Cyprus. The examples given are by no means exhaustive.
The views are likely to be controversial.

Basically what
Dentash considers to be a nightmare scenario is in fact the only way the
Turkish Cypriots can quickly improve their lot in economic terms, and
what he considers economic domination, is in fact economic independence
since it gives every individual the right in a full employment situation
to earn a decent living and to exercise their economic rights freely.
while it also provides Turkish Cypriot businesses with the opportunity
to respond under free market conditions to the new opportunities.

Some businesses will
gain while others will fail, but the whole economic environment will be
much better and many will prosper. There are many more issues to
consider, such as tariffs, VAT and property rights, but those will have
to wait for a sequel."